Page 25 - CIMA MCS Workbook November 2018 - Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

Analysis
All references to 2018 / 2017 are referring to the years ending 30 June 2018 / 30 June 2017 respectively.

Financial performance
The revenue of Grapple increased by 61.0% in 2018 compared to the previous year with operating
profit and pre‐tax profit increasing by 93.3% and 112.5% respectively indicating very strong
growth.

Possible reasons for the growth of revenue and profitability would appear to focus upon organic
growth. Grapple makes high quality drinks and has an excellent reputation. There is no reference
in the pre‐seen case study content to having any subsidiaries or associates. As a consequence of
this strong performance, Grapple increased its market share of Zedland’s soft drinks market from
6% in Q2 2017 to 9% in Q2 2018.

Both the operating profit margin improved from 6.7% in 2017 to 81.% in 2018, achieved by a
combination of revenue growth and control of operating costs. There was similar growth in the
pre‐tax profit margin over the same period, from 5.4% 50 7.1%.

Grapple’s return on capital employed improved from 5.9% in 2017 to 10.5% in 2018. A key factor
in this was the significant increase in operating profit which almost doubled during this period
(Z$6.0m to Z$11.6m).

From 2017 to 2018, there was an increase in non‐current asset utilisation which improved to 2.16
from 1.31 (a improvement of almost 65%). In a similar manner to ROCE, a key factor was the
growth in revenue during the period under review, whilst the carrying amount of PPE remained
virtually unchanged during the same period.

A calculation of the dividend paid in 2018 identified that a dividend of Z$5.2m was paid by
Grapple in 2018, which represent approximately 66% of the profit after tax for the year. The
dividend paid is confirmed by information disclosed in the statement of cash flows. It could be
argued that Grapple is able to afford this payment from a cash perspective as, although it its cash
and equivalents increased from 2017 to 2018, there was also an increase in long‐term loan
finance during this period of Z$6.4m.

Financial position
The liquidity position of Grapple appears adequate with a current ratio of 2.6:1 for 2018, albeit
with a fall from 3.8:1 in the preceding year. The quick ratio remains healthy, even though it fell
from 2.2:1 to 1.7:1 during the same period.

It may that these figures disguise an element of inefficiency as there was an increase in both
inventories and trade receivables during the period under review. Whilst some increase in
inventories and trade receivables may be expected, given the 61% growth in revenue, the
increase in inventories and trade receivables was 31.6% and 81% respectively.

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